Editorial: No more forbearance

RBI mustn’t relax deadline on restructured assets

Going by the data, there doesn’t appear to be much of a let up in the financial stress in corporate India. As FE reported last week, between April and December, 2014, the corporate debt restructuring (CDR) cell approved loan recasts worth some R50,200 crore. While that may seem a shade better than the R1 lakh crore worth of restructuring in FY14 and the R78,000 crore in the previous year, the number isn’t small. Moreover, there are a couple of large recasts expected in the current quarter which could take the total to well beyond what it was in FY13. One reason there could be a rush of referrals in the current quarter is because it will become more expensive for banks to hold restructured assets in their portfolios from April when RBI withdraws forbearance.

From fiscal 2016, lenders will need to classify a restructured loan as non-performing assets (NPAs) and set aside a much higher 15% by way of provisions as compared with the current 5%. Which is why bankers are keen to push forward the deadline to March 2016; lenders are reportedly meeting under the aegis of the Indian Banks Association (IBA) to request the central bank to ask for a breather. The central bank, for its part, has indicated it would not like to persist with forbearance and for the right reasons; it has pointed out that such leniency, over long periods, could result in moral hazard. Indeed, while there is no doubt a sluggish economy has dampened the demand for both consumer or capital goods leaving cash flows of companies, especially those for mid-sized and smaller firms crimped, it is also true that banks have been rather lax with their credit appraisals. It is a difficult situation because the finances of companies, large and small, are likely to remain strained at least for another year and therefore, NPAs could go up. In fact, between April and September, 2014, most of the requests for debt recasts have come from smaller corporates which is why bankers aren’t willing to call out the peak of the NPA cycle just yet. The new rules for restructured assets are also one reason banks aren’t willing to fund stalled projects where the cost overrun is more than 10%; the exposure, in such cases, would automatically become a restructured asset. However, while banks may be right in asking for some discretion, especially for small amounts, RBI should stay with its stand. Too much dispensation can only hurt credit discipline.